5 smart ways sole traders can manage money better

Managing your money well is a crucial part to a sole trader’s success. When you’re self-employed or working as a contract freelancer, your income may be irregular at times, arriving in lump sums, followed by periods of inactivity. Sole traders who don’t maintain a watchful eye on their spending may find themselves in financial trouble or deep in debt.

Here are five tips for managing your cash flow while expanding your business and wealth and lowering your tax liability.

1. Review your current finances

Many small business owners are unaware of their net position throughout the year. Keeping a good set of books and accounts that accurately reflect your assets and liabilities is one thing you can do throughout the year to stay on top of your finances.

This puts you in charge and may allow you to apply some financial strategies—like using salary or dividends, superannuation contributions, or bringing forward or deferring income—to maximise your after-tax position. A qualified accountant can help advise you on these and other financial strategies

1. Recognise your current financial status

Believe it or not many small business owners are unaware of their net position throughout the year. Keeping a good set of books and accounts that accurately reflect your assets and liabilities, especially as May and June approach each year is one thing you can easily do throughout the year to stay on top of your finance game.

This puts you in charge and may allow you to apply some financial strategies like using salary or dividends, superannuation contributions, bringing forward or deferring income, acquiring or deferring equipment or shares with the advice of your accountant to maximise your after-tax position.

2. Pay yourself

Remember to pay yourself at least a minimal wage. Having a regular stream of income helps provide your household and business with stability. It can also help with business budgeting, as you’ll have a clearer idea of how much profit you are making and whether the business is viable and sustainable.

Your salary doesn’t have to be much at the start, but it should be enough to cover your essential living expenditures.

3. Plan your spending wisely

Many people want to pay off their mortgage as quickly as possible because the debt is not tax-deductible. While you may be motivated to do this, you may want to consider if this strategy is best for you and your business.

One option is to put every spare dollar into an offset account against your home or business debt, rather than making additional capital payments. This has the same effect as making capital repayments by decreasing your interest. However, instead of requiring you to redraw or use costly overdraft capabilities, it provides you with quick access to cash for your business.

4. Build multiple sources of wealth

While you may adore what you do and believe it will set you up with a healthy source of income, it is always a good idea to have a Plan B. Economies and markets change quickly, so setting up sources of wealth separate to your business may be a wise move.

For example, contributing to superannuation regularly can help you save money in a structure that is appropriately protected in the event of bankruptcy. If you wish to ultimately own your business premises in your own Self-Managed Super Fund (SMSF), you could make this a part of your long-term business strategy.

5. Consider business insurance options

Protecting your back pocket is a major priority for many sole traders. Business insurance could help you stay in the business for the long term.

Business insurance can help sole traders manage their cash flow by paying unexpected bills, like legal fees or equipment replacement. Depending on the types of cover you choose, business insurance could also help replace lost income caused by unplanned business interruptions or injuries that leave you unable to work.

BizCover offers a range of business insurance solutions designed to provide protection against a variety of different risks, giving you peace of mind and insurance with no-dramas. Find out more today.